CHI-Dignity merger impact on St. Luke's may be minimal

A rendering of the two-building hospital at the CHI St. Luke s Health-Baylor St. Luke s Medical Center McNair Campus.

Photo: Courtesy of HKS

Catholic Health Initiatives, owner of St. Luke's Health System in Houston, and Dignity Health have agreed to merge operations, creating what would become one of the nation's largest not-for-profit hospital systems.

The companies announced Thursday that they have signed a definitive agreement to combine the Catholic health systems. The new system would include 139 hospitals in 28 states, employ 159,000 people and boast a combined revenue of $28.4 billion.

A CHI spokesman said no significant change is anticipated in specific markets, including Houston. He noted there is no overlap of service areas between the two systems. CHI has 100 hospitals in 16 states from Washington to Kentucky. Dignity has 39 acute-care hospitals in California, Arizona and Nevada plus affiliated providers in other states.

"We are joining together to create a new Catholic health system, one that's positioned to accelerate the change from sick-care to well-care across the United States," Kevin E. Lofton, CEO of Catholic Health Initiatives, said in a statement. "Our new organization will have the talent, depth, breadth and passion to improve the health of every person and community we serve."

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By the numbersA look at the combined Catholic Health Initiatives and Dignity Health Systems:

139 hospitals in 28 states

159,000 employees

$28.4 billion in revenue

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That geographical compatibility should ward off anti-trust concerns, observers said. A bulletin from the rating firm S&P Global Thursday said treasurers of the two organizations have indicated the new system "makes considerable sense over time."

The deal, expected to close in mid-2018, also awaits approval by the church and several states.

The merger has been in the works since at least October 2016, when talks between the two were first reported. Both hospital systems have been the subject of financial forecasts in the past year and analysts say the hope is that in the long run the merger will shore up some of that uncertainty.

This could be especially true for CHI, the larger, but "weaker organization financially," said Martin Arrick, managing director in S&P Global Ratings' not-for-profit healthcare group. He said CHI appears to have more to gain.

CHI, which bought St. Luke's in 2013, has particularly struggled in Texas. It laid off 810 employees and cut its payroll by 1,295 jobs between August 2016 and March 2017, most of those in Houston, where St. Luke's has not performed well against the competition. Its aging facility has also been a drain.

S&P downgraded CHI to BBB+ with a "stable" outlook in March. Dignity Health carries an A credit rating but with a "negative" outlook, which Arrick said stemmed from the presumption of the merger.

On Thursday, he said the merger should benefit both systems as they improve efficiency and expand patient care.

St. Luke's interim president Michael Covert could not be reached for comment, but Baylor College of Medicine president Dr. Paul Klotman called the merger "great news."

Baylor is St. Luke's partner in a joint venture building a new hospital just south of the Texas Medical Center, a project delayed last summer in part because of CHI's financial difficulties.

"This is a wonderful opportunity to expand our services nationally," Klotman said. "It will open up a new flow of potential patients to receive our services at the Texas Heart Institute, the Dan L Duncan Comprehensive Cancer Center and our transplant programs."

Janis Orlowski, chief health care officer the Association of American Medical Colleges, said the proof will be in the pudding.

"When you're partnered with 130 community hospitals, there's a potential for a lot of referrals to an academic medical center," said Orlowski. "The question is, can they execute that? I'm not sure."

Orlowski said the CHI-Dignity deal, following this week's merger of Advocate Health Care and Aurora Health Care, two well-heeled systems in the Midwest, represents "another stepup in the curve of mergers and acquisitions." She said the trend will pose "formidable competition for smaller systems."

Other observers said CHI-Dignity should gain negotiating power with private health insurers as a result of the deal.

Kevin Holloran, an analyst with Fitch Ratings, said that though the overall health-care market has been waiting on this announcement for a while, it is too early to say much about specific markets, given that the closing appears to be at least six months away.

In an unusual setup, both CEOs will retain their titles. CHI's Lofton will lead mission, advocacy, sponsorship and governance, system partnerships and information technology, and Dignity CEO Lloyd Dean will have responsibility for all of operations, including clinical, financial and human resources.

The system will be headquartered in Chicago. CHI is currently in Denver and Dignity is in San Francisco. Their long-term status is unclear.

Kaiser Permanente is the nation's largest not-for-profit system because its massive health plan brings its total revenue to $71 billion. St. Louis-based Ascension has less revenue, $22.6 billion, than a Dignity-CHI system, but more hospitals, 142.

The proposed merger is the most recent example of health-care consolidation, which has been on the rise for several years and has prompted worry that less competition means higher prices and fewer choices for consumers. The 87 U.S. hospital mergers and acquisitions that were announced during the first nine months of 2017 are on track to exceed the 102 such deals that were completed in 2016, according to data compiled by the management consulting firm Kauffman Hall.

Correction: This article has been changed to reflect that treasurers of the two organizations, and not the U.S. Treasury, have indicated the new system "makes considerable sense over time."